Canadian Dollar Dragged Lower by Southern Neighbour, GBP/CAD at 3-year Best

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UK-based Canadian Dollar buyers are looking at their best exchange rates in months after a U.S. inflation report shook currency markets.

The Pound to Canadian Dollar exchange rate (GBP/CAD) looks set to register its highest weekly close since August 2023.

This is after the Canadian Dollar was dragged lower by its southern neighbour on Thursday in a notable FX market reaction to a softer-than-forecast U.S. inflation report.

Softer inflation figures in the U.S. raised the odds of a rate cut at the Federal Reserve in September, which also boosted the odds of a second Bank of Canada rate cut later this month.

Canada's economy is closely linked to the U.S. due to the strong trade and financial market ties bestowed by their geographical proximity.

Interest rate expectations remain a key driver of FX markets, and the two closely linked North American currencies are falling hand-in-hand as investors see an accelerated pace of rate cuts on both sides of the border.

Above: GBP/CAD at weekly intervals. Track GBP/CAD with your own alerts, find out more here.

At the same time, markets are less confident that the Bank of England will cut interest rates on August 01 owing to this week's strong GDP report and a cautious assessment of services inflation by the Bank's Chief Economist Huw Pill.

Market-implied odds suggest September is crystalising as the preferred date for a first interest rate cut.

Divergent interest rate expectations favour the Pound over the Canadian Dollar, resulting in this week's move by GBP/CAD to 1.7614. This is a level last achieved in August 2021.